Dollar continues to weaken against rivals

Canadian dollar reaches 30-year high against U.S. counterpart

By

WanfengZhou

NEW YORK (MarketWatch) -- The dollar remained under pressure Tuesday as investors continued to digest CNBC's day-earlier report about Federal Reserve Chairman Ben Bernanke's comments and awaited his Wednesday speech for more clues on the U.S. interest-rate outlook.

At the same time, the euro and pound were lifted after solid euro-zone and U.K. manufacturing data.

Strong economic reports out of the euro zone and the U.K. "are fueling gains on the European currencies," said Mike Malpede, senior currency analyst at Man Global Research. "The technical dynamics still are pointing towards a weaker dollar."

In late New York trading, the euro strengthened to $1.2621, up 0.5%. The dollar weakened to 113.25 yen, down 0.4%. The British pound was fetching $1.8406, up 1%, while the dollar changed hands at 1.2368 Swiss francs, down 0.4%.

"The euro/dollar remains grossly overbought in the near term, but the momentum of the trend may carry it higher still before a more serious retracement kicks in," said Boris Schlossberg, senior currency strategist at FXCM, in a note.

'If you have a Federal Reserve Board chairman [who] looks less credible, that could be considered dollar-negative.'
Mike Malpede, Man Global Research

The dollar rebounded from a one-year low against the euro late Monday after CNBC business-news anchor Maria Bartiromo said the Fed chief told her that the media and the markets had misinterpreted his words last week as a signal that the central bank would pause after one more rate rise. Bernanke also reportedly said he regretted that anyone in the financial markets would view him as dovish.

Last Thursday, Bernanke told the congressional Joint Economic Committee that the Federal Open Market Committee, the Fed's policy panel, would pause at some point to assess the impact of its steady stream of rate increases even if inflation risks remain. He also said, however, that a pause did not mean further rate rises were out of the question.

"He's backtracking [on] his past statement and he's trying to clarify through the media, which makes him look a little bit less credible. If you have a Federal Reserve Board chairman [who] looks less credible, that could be considered dollar-negative," said Malpede.

Analysts at ABN Amro said the "reaction looks overdone" since Bernanke was "pretty clear" in his testimony that "the Fed pause was just a pause and the next moves would be data-driven."

Rate outlook

The Fed has increased interest rates 15 times in a row since June 2004, which has given the U.S. currency a very attractive yield differential against the euro and yen. The federal funds rate currently stands at 4.75%.

The federal-funds futures market is pricing in a higher probability of continued rate increases by the Federal Reserve after the CNBC report.

Fed policy-makers are still widely expected to boost benchmark rates to 5% at their next meeting May 10. But traders are now pricing in a 71% chance that the federal funds rate will be at 5.25% after the next two Fed meetings, up from a 66% chance before the report.

Earlier, the dollar showed little reaction to a report that showed pending home sales dropped 1.2% in March.

The pending-sales data were damped by mortgage-interest rates "that have been trending up since January," said David Lereah, chief economist at the National Association of Realtors.

"This means a modest slowing can be expected in the sales pace in the months ahead, although the market will hold at historically strong levels," Lereah said.

Iran weighs

A report that China and Russia have indicated to Iran that they will not support any sanctions or military actions against Iran also put pressure on the dollar, analysts said.

Iranian Foreign Minister Manuchehr Mottaki said Russia and China have told the Tehran government they will veto any attempt to impose sanctions or attack militarily, the BBC reported, citing an interview in the Tehran newspaper Kayhan.

"There is a very wrong assumption held by some that the West can do anything it wants through the Security Council," Mottaki is quoted as saying.

Sterling, euro up on strong data

The euro and pound advanced on the dollar after a euro-zone survey on manufacturing rose to a five-year high.

The euro-zone manufacturing PMI index came in at 56.7 in April, up from 56.1 in March. The increase was in line with expectations.

Separately, the U.K. survey on manufacturing also rose to a stronger-than-forecast 54.1 in April, from a seven-month low of 51 in March.

The European Central Bank meets on Thursday. Economists widely expect the bank to leave rates unchanged at 2.5% in May and raise rates by a quarter-point in June.

Aussie, loonie rally

In other developments, the Australian dollar strengthened 0.7% to 0.7619 ahead of an interest-rate decision by the Reserve Bank of Australia later Tuesday.

Analysts are divided over whether the central bank will lift rates by a quarter-point to 5.75%.

"We think it is unlikely, but it's a tough call," said Steve Barrow, chief currency strategist at Bear Stearns.

"We suspect the Aussie will stay strong, either because rates are hiked tonight or ... because the RBA statement on policy sets the market up to expect higher rates in the future," he said in a note.

Elsewhere, the Canadian dollar rallied to a 30-year high against its U.S. counterpart, underpinned by record commodity prices.

The U.S. dollar last traded at C$1.1065, down 0.7%, after earlier touching $1.1055.

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